By Sean Kelly
Within a day or two of posting this commentary, the chairman of the Federal Reserve will deliver what we are told will be a “profoundly consequential” speech to a gathering of central bankers and economists from around the world.
What does Jerome Powell have up his sleeve? These things are usually strategically leaked, so at this point it is widely reported that the head of the Fed will announce a policy shift called “Average Inflation Targeting” (AIT).
AIT means the Fed will allow inflation to run hotter than normal. For years the Fed has targeted maintaining an average inflation rate of two percent. It has undershot its two percent target many times over the years, so from now own the Fed will apparently not mind overshooting its target: it will all average out in the end.
Well, maybe.
Making your hard-earned dollars buy less is a funny policy objective. It would be hard to find among your friends, colleagues, and neighbors any that want the cost of living to go up. Most Americans are already cutting things pretty close, particularly now. It is also hard to find any intellectual justification for the Fed’s target inflation rate. In fact, it is so completely arbitrary that it falls under the category of junk science.
At that two percent rate, a saver’s $50,000 turns into about $30,000 in purchasing power in twenty-five years.
That is not a great incentive to save dollars for future retirement… or for anything else. And now the Fed will crank up the rate of dollar destruction. So, ask yourself, knowing what the Fed is up to, what you think will be worth more in 25 years? Which would it make more sense to set aside right now, today? A pile of dollars of some amount, or an equivalent pile of gold?
Average inflation targeting is only a sign of bigger things to come. Fed watchers are even calling it “soft inflation targeting.” Nobody expects the Fed to keep strictly to averages. It just wants out from under this two percent policy.
Inflation is not like a light switch that can be turned on or off. It is not like a thermostat that can be dialed up or down. Millions of individuals make choices based on their individual needs and preferences, their ages, political expectations, special family issues, job security, and other considerations. It is for that reason that the effects of inflation, an increase in the supply of money and credit, show up, often unpredictably, in different places at different times. In the late 90’s it showed up in dot com stocks. In the early years of the new millennium it showed up in the housing market.
Based on the numbers this summer, it looks like a lot of the money-printing is starting to show up in everyday consumer prices. Core consumer prices for July showed their biggest increase since January 1991.
This has happened more times than we can count. The authorities print a lot of money. Then, because the effects of money printing usually lag, at least in the beginning, they double down with another round and print even more.
That’s when it gets out of hand. That when gold really takes off!
Economist Robert Wenzel writes, “There is no way the Fed pulls this off without blowing price inflation through the roof. They are working with models that project a steady rise in inflation. They have no idea, apparently, that price inflation can get way out of control, above five percent, very rapidly and that it would then require short-term rates of near seven percent rather than zero to choke of the price inflation.”
One more thing we think you should know. Credit Suisse, is a global wealth manager headquartered in Zurich. The Swiss have a rather good track record with gold. They know it is real money. The Swiss franc maintained a statutory gold backing longer than just about anyone.
Last week Credit Suisse took note of the adjustment in the gold price, and wrote its clients, “We see plenty of upside on the gold price and view the correction as a buying opportunity.”
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